1.
MNI Connect
Video Conference
Governor of Latvijas Banka
Member of the ECB's
Governing Council
Mārtiņš Kazāks, PhD

2.
Inflation higher for longer, risks of second-round effects and
de-anchoring of inflation expectations remain.
Monetary policy: decisions data driven, to go beyond the levels
of neutral rate, hikes to become more cautious, all instruments
to be aligned to reach 2% in medium term, avoid fiscal and
financial dominance.
Main
takeaways Fiscal policy to guard against short-term downside risks to
growth. Fiscal support should be timely, temporary, targeted and
not to add to inflation risks.
Russia`s war against Ukraine, global energy crises and ensuing
supply chain problems add to uncertainty: downside risks to
growth and upside risks to inflation; recession risks..
Effective policy risk: monetary, fiscal, structural, macroprudential.
Energy is the key risk: longer-lasting impact and fear for
competitiveness of energy intensive industries.

3.
Economic Policy Uncertainty index
0
100
200
300
400
500
600
700
800
900
1000
0
50
100
150
200
250
300
350
400
2006 2008 2010 2012 2014 2016 2018 2020 2022
Europe United States China (rhs)
Conference Board Leading economic index
(%; annual growth rate)
0
-40
-30
-20
-10
0
10
20
30
40
2006 2008 2010 2012 2014 2016 2018 2020 2022
EZ recessions US recessions Euro zone US China UK
3 Source: Economic Policy Uncertainty, Conference Board, LB calculations (latest obs. 10/22).
Heading into a slowdown amidst rising uncertainty
and risk of recession
Global
financial
crisis
Shift in US trade policy;
withdrawal from Iran deal;
instability in EM
economies; Covid-19
Russia-Ukraine war,
China lockdowns,
energy crisis
Start of the
European
sovereign
debt crisis
Brexit vote;
US elections

4.
EA industrial production (100 = 01/22)
90
92
94
96
98
100
102
104
01/21 04/21 07/21 10/21 01/22 04/22 07/22
Total production
Energy-intensive industries
Industrial confidence indicator (balance of answers)
-30
-20
-10
0
10
20
30
01/21 04/21 07/21 10/21 01/22 04/22 07/22 10/22
Paper and paper products
Coke and refined petroleum products
Chemicals and chemical products
Other non-metallic mineral products
Basic metals
Total industry
4 Sources: Eurostat and LB calculations. Last obs. for IP – september, 2022.
Industrial production figures are hiding disruption of
energy-intensive industries and their weak outlook

5.
HICP, HICP ex. food and energy (y/y, %)
-2
0
2
4
6
8
10
12
01/08 09/09 05/11 01/13 09/14 05/16 01/18 09/19 05/21
Headline and core inflation by EA country (%; y-o-y,
October 2022)
7.1
7.3
7.4
8.4
8.6
8.8
9.4
9.5
10.3
10.6
10.6
11.5
11.6
12.6
13.1
14.5
16.8
21.7
22.1.0
22.5
0 5 10 15 20 25
FR
ES
MT
FI
CY
LU
IE
EL
SI
PT
EA
AT
DE
IT
BE
SK
NL
LV
LT
EE
Core inflation
Headline inflation
5 Source: Eurostat.
Inflation has increased broadly across countries

6.
Distribution of HICP (295 items; latest data for October, 2022)
0
10
20
30
40
50
60
70
80
90
100
-10
-5
0
5
10
15
20
25
30
01/18 04/18 07/18 10/18 01/19 04/19 07/19 10/19 01/20 04/20 07/20 10/20 01/21 04/21 07/21 10/21 01/22 04/22 07/22 10/22
90% of items 75% of items 50% of items Headline inflation Above 2% RHS
6 Source: Eurostat.
Inflation is broad based

7.
HICP annual growth rate (%) by components (pp)
-2
0
2
4
6
8
10
12
01/19 06/19 11/19 04/20 09/20 02/21 07/21 12/21 05/22 10/22
Food
Non energy industrial goods
Energy
Services
HICP inflation excluding energy and food (%) and
decomposition (pp)
7 Source: Eurostat, Latvijas Banka's calculations, ECB. Last observation: October 2022, September for HICP core components.
Energy and food price increases leading inflation surge,
other sectors also picking up

8.
US oil production and crude oil price (USD; mbpd)
10
15
20
25
30
0
20
40
60
80
100
120
2019 2020 2021 2022 2023
Brent price
Brent Futures
US oil production (rhs)
US Oil production forecast (rhs)
TTF Natural gas price and Russian gas flows to
Europe (euro; Gwh/d)
0
1000
2000
3000
4000
5000
6000
7000
0
50
100
150
200
250
300
350
2019 2020 2021 2022 2023
TTF Natural gas price
Futures contracts
Russian gas flow to Europe (rhs)
8 Source: EIA, Refinitiv.
Global energy prices have declined from
peak levels as recession fears mount

9.
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
01/17 08/17 03/18 10/18 05/19 12/19 07/20 02/21 09/21 04/22
Goods Services Primary income
Secondary income Current account
9
Euro area current account balance,
(EUR million, working day and seasonaly adjusted)
Source: Eurostat.
Trade balance reflects
negative shocks.
Weaker currency
makes imports even
more expensive.

10.
Shipping Indexes (daily frequency)
0
2000
4000
6000
8000
10000
12000
2017 2018 2019 2020 2021 2022
FBX Global Container Index (USD)
Baltic Exchange Dry Index (BDI)
HARPEX Shipping Index
CCFI Index
SCFI Index
Global Supply Chain Pressure Index
(st. dev. from long-term average)
-2
-1
0
1
2
3
4
5
01/19 06/19 11/19 04/20 09/20 02/21 07/21 12/21 05/22 10/22
10 Source: Refinitiv, Markit, Ifo Institute, New York FED.
Global supply chain pressures, shipping and transportations logjams
have significantly eased up, but risks remain

11.
Consumer expectations survey (diffusion index)
-60
-40
-20
0
20
40
60
80
100
01/20 05/20 09/20 01/21 05/21 09/21 01/22 05/22 09/22
EA countries
EA
Distribution of long–term (5 years ahead) inflation
expectations in Survey of Professional Forecasters
(percentage of respondents)
0
5
10
15
20
25
30
35
40
45
≤ 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 ≥ 2.5
Q2 2022
Q3 2022
Q4 2022
11 Source: European Commission, ECB. Last obs. October 2022.
Risk of feeding higher-for-longer inflation into expectations;
risk of de-anchoring

12.
-6
-4
-2
0
2
4
6
8
2020Q1 2020Q3 2021Q1 2021Q3 2022Q1 2022Q3
q/q y/y Wage tracker
12
Compensation per employee, (q/q and y/y changes, %)
seasonally and calendar adjusted) and wage tracker
Indeed (y/y, %)
Source: ECB, Bank of Ireland, Indeed.
Wage growth
surprisingly modest
so far, however it is
likely to accelerate

13.
Scenarios for euro area real GDP and inflation
(annual percentage changes)
13 Source: ECB September 2022 MPE.
Geopolitical uncertainty and Russia`s war is pushing the euro
zone closer towards a contraction in 2023
-8
-6
-4
-2
0
2
4
6
2019 2020 2021 2022 2023 2024
Baseline scenario Downside scenario
0
1
2
3
4
5
6
7
8
9
2019 2020 2021 2022 2023 2024
Baseline
scenario
Downside
scenario
2022
2023
2024
2022
2023
2024
Real GDP 3.1 0.9 1.9 2.8 -0.9 1.9
HICP
inflation
8.1 5.5 2.3 8.4 6.9 2.7

14.
-1
0
1
2
3
4
5
01/20 07/20 01/21 07/21 01/22 07/22
IT PT ES FR NL DE
Covid-19
PEPP
10Y government bond nominal yields (%) Government bond real rates (%)
14 Source: Bloomberg, Refinitiv, ECB.
The rise in real yields adds to tightening of financial conditions
-4
-3
-2
-1
0
1
2
3
01/14 01/16 01/18 01/20 01/22
Euro zone 2Y US 2Y Euro zone 10Y US 10Y

15.
Monetary policy
normalization
in 3 steps
15
▪ Withdraw monetary accommodation by
frontloading increases in policy rates.
▪ Thereafter smaller rate hikes as risks become
two-sided.
▪ If needed to achieve our policy aim of price
stability, proceed with rate hikes above the
neutral.
▪ In parallel with tightening of policy rates, align all
instruments, including balance sheet.

16.
16
ECB Deposit facility and €STR rate (%)
Source: Refinitiv.
Progress in
withdrawing monetary
policy accommodation;
further steps should
follow
▪ The fastest increase of our interest
rates by 200 basis points
▪ Changes in the terms and conditions
of the third series of targeted longer-
term refinancing operations (TLTRO III)
▪ Alignment of the remuneration of
minimum reserves with money
market conditions
-1.0
-0.5
0.0
0.5
1.0
1.5
01/20 07/20 01/21 07/21 01/22 07/22
€STR
Deposit facility rate

17.
17 Source: ECB, NCBs estimates
-2
-1
0
1
2
3
4
5
6
7
-2
-1
0
1
2
3
4
5
6
7
1999 2002 2005 2008 2011 2014 2017 2020
Data: SMA Data: OIS Data: Consensus (Euribor)
Data: Consensus (ESTR) Term structure-based: GS+JSZ Term structure-based: GS
Term structure-based: Ajevskis Term structure-based: BGL Semi-structural: Proxy
Semi-structural: BM Semi-structural: HLW Semi-structural: HLW (pi*, 2y ahead SPF)
Semi-structural: HLW (pi*, 5y ahead SPF) Econometric estimates: Jarocinski DSGE: GN
Econometric estimates of euro area r*
(percentages per annum)
The exact level of «neutral»
rate is unknown.
But clearly at the current
level of rates policy still
accomodative.
This explains significant
increases of rates in the
past, and why more rate
hikes are underway.

18.
€STR SWAP implied rates (as of 22 Nov) for the
forthcoming ECB meetings (%)
-0.8
-0.3
0.2
0.7
1.2
1.7
2.2
2.7
3.2
04/21 07/21 10/21 01/22 04/22 07/22 10/22
June 23 GovC Sep 23 GovC Dec 23 GovC
3M Euribor futures curve (% p.a.)
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
06/22 06/23 06/24 06/25 06/26 06/27 06/28
21.11.2022
Last GovC (10.27.2022)
Day before Sep. GovC (07.09.2022)
Day before June GovC (08.06.2022)
18 Source: Bloomberg.
Market expectations in line with policy rates above r*, but the
exact level will depend on the changes in inflation outlook

19.
- 1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1Q
20
2Q
20
3Q
20
4Q
20
1Q
21
2Q
21
3Q
21
4Q
21
1Q
22
2Q
22
3Q
22
4Q
22
1Q
23
2Q
23
3Q
23
4Q
23
1Q
24
2Q
24
3Q
24
4Q
24
HICP HICP ex energy and food
19 Source: ECB September 2022 MPE.
Euro area HICP, actual data and projections for
2023-2024 (annual % changes)
One way of monitoring
inflation outlook is by
looking at our projections.
But our models, and, of
course, also projections, are
not perfect.
Continue to rise rates until
they become consistent with
the 2% target.

20.
Bloomberg 1-year ahead recession
probability index
0
10
20
30
40
50
60
70
80
90
100
06/12 06/14 06/16 06/18 06/20 06/22
US EA
Swap implied inflation
expectations in EA (% and pp)
0%
1%
2%
3%
4%
01/08 01/11 01/14 01/17 01/20
1y1 5y5y ECB target
20 Source: Bloomberg, Eurostat, Bank of Ireland, Indeed, Latvijas Banka's calculations.
Analysis needs to be complemented by a broader
set of indicators (and judgement!)
Compensation per employee, (q/q and y/y
changes, %) and wage tracker Indeed (y/y, %)
-6
-4
-2
0
2
4
6
8
2020Q1 2020Q3 2021Q1 2021Q3 2022Q1 2022Q3
q/q
y/y
Wage tracker

21.
Eurosystem balance sheet (% of GDP),
excess liquidity (% of GDP)
Excess liquidity and the €STR-DFR spread
(x-axis: EUR tn; y-axis: basis points)
21 Source: Bloomberg, Eurostat, ECB.
Further withdrawal of excess liquidity should follow with a gradual
phasing out of APP reinvestments and followed by PEPP reinvestments
0
10
20
30
40
50
60
70
80
01/15 01/16 01/17 01/18 01/19 01/20 01/21 01/22
ECB balance sheet as % of GDP Excess liquidity as % of GDP

22.
22
Output gap vs structural balance (% of GDP)
Source: European Commission, ECB.
Monetary policy is not
the only game in town.
Fiscal support must be timely,
temporary, and targeted in
order not to add to inflation
risks.
Structural and macroprudential
policies should promote
macroeconomic stability and
long-term growth.
-6
-5
-4
-3
-2
-1
0
1
2
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Structural deficit Output gap

23.
Thank you!